Project context and objectivesAcross the 28 Member States of the European Union (EU-28), as well as the EU Candidate countries, a great deal of effort is being invested by governments in developing and testing policy measures to enable the formalization of undeclared work. To help countries learn about what works and what does not, a ‘knowledge-bank’ was created by the Eurofound (http://www.eurofound.europa.eu/areas/labourmarket/tackling/search.php). This contains over 200 ‘good practice’ policy measures from 36 European countries and was most recently updated in early 2013. What is immediately apparent upon reviewing these policy measures, however, is that few have been evaluated. This is the starting point of this project. The main goal is to provide concrete policy recommendations about what policies may work better based on rigorous empirical evidence for those seeking to tackle the undeclared economy in the Balkans. In particular, the objectives of the project are to:1. Conduct a comprehensive review of the policy approaches and measures being used to tackle undeclared work. Across the globe, there is a shift away from deterrence approaches and measures that seek to eradicate the undeclared economy and towards approaches and measures to enable the formalisation of such activity. Until now, however, no comprehensive reviews have been conducted of the approaches and measures being used to achieve this across Europe, North America and Australasia. This project fills that major gap by reviewing the commonalities and differences in approach and measures, what they are seeking to achieve and what they have achieved so far.2. Empirically evaluate the measures for facilitating the shift of undeclared work into the declared economy in the selected target region. Going beyond a normative approach, we will use a mix of quantitative and qualitative methodologies in order to: a) through focus groups and a large scale survey, compare the intentions of the legislator with the results as seen by policy-takers (those who have to comply with them) at the economic but also, and equally importantly, at the social level and b) review evaluations of the possible expected results of measures from other countries and contexts on the policy-takers in the selected target region, not least by testing and measuring their expectations during focus groups and surveys.3. Based on the results of the first two objectives, the final objective is to recommend possible new policy approaches and measures (or endorse old ones) that will facilitate the shift of undeclared work into the declared economy.

Work performed and results

Conceptualising policy approachesThe initial phase has firstly, developed a theoretical framework for understanding the diverse policy approaches towards undeclared work (Williams, 2014a) and secondly, provided a comprehensive review of the policy approaches and measures used in advanced economies for tackling undeclared work (Williams, 2014b) and assessed their transferability to Bulgaria (Dzhekova and Williams, 2014; Williams et al., 2014b), Croatia (Franic and Williams, 2014) and FYR Macedonia (Dzhekova et al., 2014; Williams et al., 2015). Table 1 summarises the theoretical framework for understanding the different policy approaches towards undeclared work. On the one hand, there is a direct controls approach which treats participants in undeclared work as rational economic actors and seeks compliance by ensuring that the costs of operating in the undeclared economy are outweighed by the benefits of operating in the declared economy. This is accomplished either by increasing the costs of non-compliance (‘sticks’) and/or by making the conduct of work in the declared economy more beneficial and easier (‘carrots’). On the other hand, there is an indirect controls approach, which shifts away from using ‘sticks’ and ‘carrots’ to elicit behaviour change, and instead focuses upon developing the social contract between citizens and the state by nurturing a high trust high commitment culture.

Conventionally, governments have used direct controls, viewing participants as rational economic actors who engage in undeclared work when the pay-off is greater than the expected cost of being caught and punished. In most countries, this has been achieved in practice by increasing the actual and perceived risks and costs of participating in undeclared work. This has involved firstly, raising the perceived or actual likelihood of detection and/or secondly, increasing the penalties for engaging in such work. This approach, therefore, has used ‘sticks’ to detect and punish non-compliant (‘bad’) behavior. In many countries however, there has been a gradual recognition that their goal is not so much to eliminate undeclared work but rather, to transform it into declared work. A consequence is that greater attention is starting to be given to using incentives to increase the benefits of declared work. In other words, rather than punish non-compliant (“bad”) behaviour, measures are being sought that reward compliant (“good”) behaviour, rather than taking it as given. Until now however, such measures are the exception rather than the norm. The norm continues to be the use of sanctions and detection to deter engagement. A prominent reason is that providing incentives is a costly option. In recent years, an emergent literature has drawn attention to a potentially more cost effective way of tackling the undeclared economy based on the use of indirect controls. Viewed through the lens of institutional theory, this recognises that all societies have formal institutions (i.e., codified laws and regulations) that set the legal rules of the game (prescribing ‘state morality’) and also informal institutions which are norms, values and beliefs of the citizens (‘civic morality’). The argument is that when symmetry exists between the formal and informal institutions (i.e., state morality and civic morality), the undeclared economy will be largely absent since citizens will adhere to the legal rules of the game. However, when asymmetry exists between a society’s formal institutions and its informal institutions, such as due to a lack of trust in government or a belief that government serves the interests of the ruling class rather than citizens in general, the undeclared economy will be larger. The task, therefore, is to reduce the level of institutional asymmetry. Until now however, there has been little contemporary evaluation in these Balkan states of participants’ motives for engaging in undeclared work and whether these policy approaches and their associated measures are effective at reducing participation in undeclared work, and their complex interactions and dynamics.

Evaluating the policy approachesTo start filling this gap, the initial phase of this project has used existing datasets to analyse the relationship between the policy approaches and participation in undeclared work, as well as the interaction effects between different policy approaches (e.g., whether increasing deterrents reduces tax morale). Using a 2013 Eurobarometer survey of undeclared work, this has revealed that the likelihood of participation in undeclared work significantly decreases as the degree of institutional asymmetry decreases, but that there is no significant association with increasing the penalties and risks of detection. This has been revealed in Bulgaria (Williams and Franic, 2015c), Croatia (Williams and Franic, 2015a,b) and also in other European regions (Williams and Horodnic, 2015). Based on this, and having reviewed the methods used for studying undeclared work (Williams, 2015; Polak et al., 2015), various research instruments (household and business surveys, stakeholder surveys, focus groups) have been designed to analyse in greater depth participants’ motives and how various policy approaches and measures affect the level of participation in undeclared work. Ethics approval has been received and the pilot studies completed.

Expected results and their impactsIt is expected that the results will provide an evidence-base that reinforces the need to shift away from using solely the conventional deterrence approach that uses direct controls to ensure that the pay-offs from undeclared work are outweighed by the costs. The expectation is that the findings will highlight the significant association between institutional asymmetry and participation in undeclared work and therefore the need to use indirect controls that reduce the asymmetry between formal and informal institutions. The research methods will also evaluate the effectiveness of different policy measures that seek to improve the social contract between the state and its citizens in order to promote commitment to compliance. On the one hand, they will evaluate whether changing informal institutions (i.e., the norms, values and beliefs of citizens regarding compliance) such as by improving tax knowledge, awareness raising about the costs of undeclared work and benefits of declared work, or normative appeals, are a useful way forward in these countries. On the other hand, they will evaluate whether changes in the processes of formal institutions such as the pursuit of greater procedural and redistributive justice and fairness will be effective in the eyes of policy-takers. The outcome is expected to be a more refined and nuanced understanding of what might work in terms of the transferability of specific policy measures to these countries and what will not (Kojouharov and Williams, 2015; Williams and Dzhekova, 2015; Williams et al., 2014). It is also expected however, that the research will reveal that direct and indirect controls can be more effective when combined and used together. To investigate this, the interaction effects and dynamics involved will be investigated, so as to develop a more nuanced and variegated understanding, such as whether deterrents are more effective when tax morale is low. The net outcome is likely to be the advocacy of a shift beyond the conventional deterrents approach and the identification of a range of specific policy measures which are transferable and can be used to reduce the undeclared economy in each of the three countries. GREY project website: http://www.grey-project.group.shef.ac.uk/